The company operating the fund has to own the underlying assets that it monitors in order for a cryptocurrency ETF to operate properly.
Theoretically, a crypto-currency exchange-traded fund (ETF) functions like every other ETF. Although most ETFs control an index or asset basket, one or more digital tokens will be monitored by a cryptocurrency ETF. Digital token ETFs, like other ETFs, would trade on an exchange like a common stock, and they would be subject to price fluctuations during the day as investors buy and sell.
How does it work?
The company operating the fund has to own the underlying assets that it monitors in order for a cryptocurrency ETF to operate properly. In other words, the ETF will be expected to own a proportionate stake in digital tokens. The ownership of these coins will then be represented as securities, and investors in the ETF would indirectly own those tokens by purchasing those shares. Thereafter, ETF investors will be exposed to the upside potential of the underlying assets.
Things to consider
- So where are crypto-currency ETFs now? The Exchange Commission (SEC) and securities have so far suggested that cryptocurrency ETFs will not be permitted until the markets show a degree of stability and protection. However, the status of the SEC has not prevented a number of parties from trying to launch ETFs for digital currencies.
- The Chicago Board Options Exchange (CBOE), which introduced bitcoin futures, lobbied the SEC to rethink its previous digital token fund blockage. Cameron and Tyler Winklevoss, the creators of the influential Gemini digital currency exchange, continue to petition the SEC to unsuccessfully approve a bitcoin ETF.
- A index fund providing exposure to 4 of the biggest digital currencies was introduced by Coinbase, an incredibly successful digital currency exchange, but that's not exactly the same as an ETF. Some ETFs also give limited GBTC exposure, but these are not based solely on cryptocurrencies.
- The SEC has expressed openness to the prospect of potential cryptocurrency funds, and if cryptocurrency ETFs succeed in other parts of the globe, this may continue to boost investor excitement. Cryptocurrency ETFs have been launched in various markets in Europe and Asia, for instance, thanks to varying levels of regulation. U.S. investors will have to wait, however, for the time being.
Bitcoin Investment trust vs Cryptocurrency ETF
As of November 2019, there are no crypto-currency ETFs currently trading publicly in the U.S. The Bitcoin Investment Trust is the nearest thing (GBTC). In several respects, this trust functions like an ETF; it owns bitcoins on behalf of investors and enables them to trade in trust shares.
However, Grayscale Investment Trust, the fund's sponsor, charges an annual management fee of 2% of the fund's assets, a price point that is considerably higher than most other ETFs. In addition, as the first confidence of its kind, GBTC has undergone some strange price fluctuations compared to the shifts in bitcoin's value. Although one would expect GBTC to converge with bitcoin prices, this has not always been the case so far. Overall, GBTC is not yet open to conventional investors with a high cost ratio and lofty minimum investment.
There are few opportunities for U.S. investors seeking to take part in digital currency ETFs. If they have access, investing in foreign ETFs is one solution. That's another option if they follow the rigorous conditions for investing in GBTC. However, these investors may be better off looking at a related community of ETFs, blockchain ETFs, for the time being.
The crypto-currency space is sponsored by blockchain technology and is closely related to digital tokens. There is a rising number of ETFs targeting blockchain-related businesses. This may include developers and manufacturers of computer processors that are closely linked to the cryptocurrency field. ETFs such as the Amplify Transformational Data Sharing ETF (BLOK) and the Nasdaq NextGen Economy ETF (BLCN) Truth Shares give investors access to companies focused on the space of the blockchain. Many of these ETFs have already seen tremendous success.
Cryptocurrency ETFs Benefits
A few of the most popular cryptocurrencies have seen outlandish income. The sector, however, remains surrounded by uncertainty and is plagued by strong volatility. For this reason, most investors will prefer to participate in the crypto-currency space using a vehicle such as an ETF.
Investors should take advantage of the opportunities offered by currency ETFs while leaving management and security to experts. It can be acknowledged why investors would want to take this extra precaution, considering that cryptocurrencies and digital token exchanges are still regularly the targets of criminals and scammers.
A crypto-currency ETF has many advantages over straight-up crypto-currency investments. First, digital hard ware wallets and exchanges are highly susceptible to hacking and theft, as described above. With little to no recourse, investors keeping digital tokens run the risk of seeing their investments vanish. However, an investor in a digital currency ETF has an additional protection layer in the custodian bank that funds the ETF.
Another advantage of a cryptocurrency ETF is that many digital tokens can be tracked at once utilising it. The environment of cryptocurrencies is extremely compartmentalised, and investors can have to own and operate several wallets and accounts through numerous digital currency exchanges looking to keep a basket of, say, 20 distinct tokens.
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